Economic Policy and Resource Implications of Biofuel Feedstock Production

Abstract

Dramatically higher fuel prices and massive petroleum imports from politically unstable countries have contributed to a major national initiative to generate renewable fuels in the United States. Often, such policies are enacted and implemented with huge taxpayer expenditures without due diligence to the consequences.

The evaluation of the water quality impacts of converting pastureland to intensive biomass production for fuel in a southern Texas watershed suggest significant increases erosion and nutrient loadings to water bodies. The Best Management Practices (BMPs), cover crop and filter strips when implemented individually failed to produce status-quo reduction levels. Combined BMPs implementation produced improved mitigation, at substantially higher costs, highlighting the issue of sustainability related to the economics of renewable fuels.

The estimation of the net energy of biomass ethanol accounting for the production input data indicate a greater than one energy return for biomass crops. However, the policy results indicate that only 70 percent in net contribution to the energy supply is achieved due to relatively lower energy returns compared to conventional fossil fuels. In addition, because the ethanol produced has to have the energy used deleted from the total, the cost of producing a gallon of biomass ethanol is substantially higher than that of gasoline.

The impacts of an exogenously-specified biofuel mandate fulfilled by the production of a dedicated biomass crop and its consequent effects on commodity prices and overall welfare are estimated. Net farm income increased due to an increase in crop prices; however, both consumer surplus and total surplus decreased. The analysis is extended to estimate the sensitivity of Conservation Reserve Program (CRP) acres returning to crop production and the potential of higher biomass yields. The results indicate that net farm income decreased and consumer surplus increased due to a decrease in crop prices, resulting in an increase in overall welfare.

This current research evaluates the unintended consequences of the U.S. energy policy and provides interesting insights of the potential economic and environmental impacts. These results suggest policy makers should be cautious before enacting energy policy and consider multiple alternative energy sources in an economic and financial context to achieve a sustainable energy goal.